Blackstone Earnings Take A Beating In Q3, But Assets Near $1T

Investment giant Blackstone faced a free fall in its net income in the third quarter but still managed to grow its assets under management to its highest level ever at nearly $1T.

The company on Thursday reported its profits took a dive during the third quarter as the escalating cost of capital took its toll, exacerbated by a related slower pace of deal-making and caution among banks and other lenders.

345 Park Ave.
345 Park Ave. In New York City, Where Blackstone Keeps Its Headquarters.

"Inflation, rising interest rates and a slower economy, combined with ongoing geopolitical turmoil, have created an extremely difficult environment for investors to navigate," Blackstone Chairman and CEO Steve Schwarzman said during the call.

Blackstone’s net income cratered in Q3 to $3.7M, a nearly 100% drop compared to more than $3.2B during the third quarter of 2021. Net income per share was essentially nil during Q3 2022, compared to $1.94 a share during the same quarter a year ago.

Blackstone executives acknowledged economic turbulence but also tried to put the best face on things by stressing the underlying strength of the investor's assets, especially real estate.

The investment giant reported that despite economic turbulence, the company grew its total assets under management 30% year-over-year during Q3 to a record $950.9B.

As of the second quarter, Blackstone reported nearly $320B in real estate assets under management, its largest asset class.

Schwarzman stressed the quality of the investor's real estate assets as key to getting through economic turmoil.

"Approximately 80% of our portfolio is in sectors where rents are growing above the rate of inflation, including logistics, rental housing, life science office and hotels," Schwarzman said.

"In real estate, in the context of rising interest rates, we've materially increased cap rate assumptions across the portfolio," Blackstone Chief Financial Officer Michael Chae said.

Even so, Blackstone's real estate has seen appreciation so far this year, as cash flow growth and dividends have offset the impact of changing cap rates, Chae said.

Blackstone President Jon Gray said that "hard assets are interesting" in an inflationary environment because replacement costs are also rising significantly.

Gray recounted a discussion he had with an apartment developer with 15,000 units under construction but with plans to cut down to 4,000 units next year, a 75% drop.

"You start to see a reduction in new supply, which is obviously helpful in the long term," Gray said. "There's going to be fewer of them built, so that is an argument for investing into hard assets."

The challenge, of course, is the rising rate environment, Gray said.

"If you own a hard asset that feels like a bond, or worse, an older office building, then I think you're going to see a challenge to value because the income is not growing much and rates have gone up," he said.

On the other hand, investors who are in rental housing or logistics are still seeing 30% increases in rents in the U.S. and 20% increases in Europe, Gray said.

"Even as the cap rates go up, you can still see value appreciation, albeit at a lower rate," Gray said. "So as it relates to institutions, they become more cautious in this environment [and] don't allocate quite as much. They pause."

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